Trump's Election Frees Prison Stocks

Private prison stocks have soared in light of recent American political developments, and they may be poised to climb even higher.

Donald Trump's election and his subsequent announcement of plans to nominate Alabama Senator Jeff Sessions as Attorney General have sent investors rushing to private prison stocks in recent months. Since Election Day, shares of The GEO Group (GEO) have climbed more than 50%, and shares of CoreCivic (CXW) have surged over 70%. The cause of the rally is two-fold, said Michael Kodesch, analyst at research firm Canaccord Genuity -- Trump won, and Hillary Clinton lost.

"It's not necessarily all about what Trump's policies are but also about what Clinton's policies would have been," he said.

The Democratic nominee, who was widely expected to win the election, had called for an end to private prisons and the closure of family detention and private immigration detention centers. A single tweet from the former Secretary of State caused shares of Geo and CoreCivic to plunge in September.

The Obama administration has also taken a critical stance on private prisons. Shares plummeted in August when the Department of Justice issued a memo to the Bureau of Prisons announcing plans to phase out their use.

"Once Trump was elected, all of that went away," Kodesh said.

Trump is likely to be more private prison-friendly. He expressed his support for such entities in an interview with MSNBC's Chris Matthews in March, and his policies -- specifically those related to immigration -- bode well for the industry.

At an October campaign speech in Gettysburg, Pennsylvania, Trump proposed a two-year mandatory minimum prison sentence for illegal immigrants reentering the U.S. after deportation and a mandatory five-year minimum for illegal criminal immigrants reentering. Such a measure would likely result in the detention of more illegal immigrants by U.S. Immigration and Customs Enforcement (ICE), and from that perspective, private prisons are a massive player.

About two-thirds of immigrant detainees are kept in private facilities (as opposed to about 15% of federal inmates). According to data from the Austin, Texas-based organization Grassroots Leadership, the private prison industry is expected to acquire 80% of any future immigrant detention beds.

GEO CEO George Zoley said the private sector is the "really the only logical solution for organizations that can move quickly and meet the detention standards" ICE needs for residential centers in a November conference call.

The August DOJ memo to the BOP still stands, but if confirmed, Sessions is likely to reverse course. Regardless, facilities run by both GEO and CoreCivic have received contract renewals since then, albeit with smaller bed allotments.

To be sure, not all is working in the private prison industry's favor.

The U.S. prison population shrunk to its smallest in a decade in 2015, falling by 2% to 1.5 million prisoners at the end of that year. GEO recently ended a contract with the Vermont Department of Corrections for a prison that was at about 15% capacity.

California voters in November voted in favor of Prop 57, a proposal for increasing parole and good behavior opportunities for felons convicted of nonviolent crimes. According to the Associated Press, the measure makes about 7,000 inmates immediately eligible. At the start of 2016, there were about 25,000 nonviolent California felons who could seek early release and parole under the measure.

California voters approved similar measure, Prop 47, in 2014, which reduced nonviolent, non-serious crimes to misdemeanors and improved the chances of parole consideration for more inmates.

The measure "picked a lot of the low-hanging fruit," Kosech said, and it took several months to make a notable impact on prison populations. Something similar could happen with Prop 57.

"We're probably not going to see anything happen at first until these prisoners go through its process," he said.

CoreCivic has more exposure to California sentencing reform than GEO.

There are a number of political forces in play at well.

In August, Department of Homeland Security Secretary Jeh Johnson asked the Homeland Security Advisory Council to examine whether the agency should pull back from the use of private facilities. The resulting report sent mixed signals.

The six-person subcommittee that prepared the report determined fiscal and capacity issues made it necessary for DHS to use private for-profit entities. However, one of the members, Marshall Fitz, dissented, and more than two-thirds of the council members objected to its conclusion and instead recommended Fitz's dissent to the DHS.

It will ultimately be Johnson's successor who will decide what to do. Trump has tapped retired General John Kelly to head the department.

Lobbying activity may have an effect as well. According to data from the Center for Responsive Politics, GEO spent $580,000 on lobbying efforts in 2016 and CoreCivic, formerly Corrections Corp of America, $890,000. GEO also gave $125,000 to a pro-Trump super PAC during the presidential campaign.

"We look forward to strengthening our partnership at the Federal level as we have for the last 30 years under both Republican and Democratic administrations and believe we are uniquely positioned to provide high quality services in safe, secure and humane residential environments while maximizing cost savings for taxpayers," said GEO spokesman Pablo Paez in a statement.

CoreCivic representatives did not return request for comment.

"Despite the recent run-up, we could see more upside on both stocks," wrote Kosech and fellow Canaccord Genuity analyst Ryan Meliker in a recent analyst note.

In other words, it might not be too late for investors to hop on board.

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